We are neutral on SERBADK acquiring an additional 10% stake in Green & Smart, bringing its total equity to 25%. The acquisition is expected to provide added job flow prospects, as well as increase SERBADK’s managementrole in Green & Smart. No changes to FY18-19E numbers given minimal impact, with earnings driven by record high order-book of RM7.5b. Maintain OUTPERFORM and TP of RM4.45.

Increased stake in Green & Smart. Yesterday, SERBADK announced that it acquired an additional 10% stake in Green & Smart Holdings Plc (GSH) for RM13m cash, thereby increasing its stake in GSH to 25%. The acquisition is expected to be completed by 4Q18. Recall that SERBADK had initially acquired the first 15% stake in GSH back in July 2018 (refer to our report dated 20 July 2018) for cash of RM17m. GSH is primarily engaged in renewable energy, with expertise in biogas plants, and is listed on the London Stock Exchange.

Neutral on the acquisition. The acquisition was done based on its five-day volume weighted average market price, implying 13x PER (based on GSH’s RM10m historical earnings) - slightly above its initial 15% stake acquisition at 11x PER, but we still deem the valuations to be acceptable, nonetheless, with it still below SERBADK’s ascribed valuation of 15x PER. Overall, its stake in GSH provides SERBADK added exposure to the biogas renewable energy space, as well as added contracts jobs flow. Moreover, the additional 10% stake would enable SERBADK to have first rights of refusal on all future EPCC works under GSH, while also increasing management’s influence on the company. To-date, GSH has already awarded one EPCC contract to SERBADK (awarded in 1Q18, estimated value at c.RM70m), with GSH in the midst of developing three other bio-gas plants with estimated total project value at RM49m, as well as joint ventures to develop bio-gas plants with potential EPCC contracts valued at another RM40m.

Little financial impact. The additional 10% stake is expected to enhance SERBADK’s earnings by roughly RM1m/annum – insignificant if compared to FY18E/FY19E earnings of RM386.8m/RM435.2m. Likewise, the acquisition is also expected to have little impact on its balance sheet (net-gearing of 0.3x as at end-2Q18). All-in, we made no changes to our FY18-19E numbers, implying earnings growth of 25- 13%, driven by its order-book of RM7.5b – highest ever in record.

Maintain OUTPERFORM, with unchanged TP of RM4.45, pegged to 15x PER on FY19E earnings. We continue to like SERBADK for its: (i) consistent and commendable track record of earnings growth delivery, (ii) dynamic expansions into new markets, and (iii) superior ROE among its peers (22% versus sector average of 8%).

Risks to our call include: (i) lower-than-expected order-book replenishment, (ii) weaker-than-expected margins, and (iii) geopolitical events in the Middle-East affecting oil and gas-related activities.

Source: Kenanga Research - 23 Nov 2018